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Encana Plans To Let Gas Hedges Expire In Bold Bet On Recovery

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By Edward Welsch

Of DOW JONES NEWSWIRES

CALGARY -(Dow Jones)- Encana Corp. (ECA) is making a bold bet on natural gas prices starting to recover in 2013: it isn't renewing its hedges.

The company's hedging program has protected its earnings for the last few years as natural gas prices have plummeted, reaching 10-year lows recently, due to a surge in production from shale gas drilling.

Leaving the safety of hedging behind is a risky step for the Calgary company, which is North America's second largest natural gas producer after Exxon Mobil Corp. (XOM). Two-thirds of Encana's 3 billion cubic feet a day of production is hedged this year at an average price of $5.80 a thousand cubic feet, or more than twice current market prices. Just one-sixth of the company's production is hedged for 2013.

"We are optimistic about a potential natural gas price recovery going into 2013," Chief Executive Randy Eresman said on a conference call Wednesday. "We see much more upside than downside in natural gas prices, so it wouldn't be a good time to hedge," he said.

Encana says it has reasons to be optimistic about natural gas. Prices have fallen so low that producers are starting to take supply off the market - Encana itself is scaling back production by 600 million cubic feet a day before royalties this year.

Electricity utilities have also begun taking advantage of low natural gas prices to switch from coal - Encana said over the last five to six months some 7 billion cubic feet a day of natural gas has been consumed by power companies that have switched from coal.

And over the next few years, Encana said it's optimistic that liquefied natural gas export terminals, including a plan Encana is involved with to export gas from Kitimat, B.C., will start to reduce the oversupply of gas in North America.

Encana also doesn't have the option to renew its hedges at the same levels it has - natural gas futures hedges for April 2013 are currently trading on the New York Mercantile Exchange at around $3.17 a million British thermal units. A million British thermal units is roughly equivalent to a thousand cubic feet of production.